How To Reduce Your Inheritance Tax Bill

“We all want to see a system where it is only the very rich that pay inheritance tax, and not hard working people” – these were the words of David Cameron.

Despite these intentions, an increasingly large number of people will leave their loved ones with a hefty tax bill when they die.  The current “IHT” threshold is £325,000 and the additional nil rate band will not begin until the 6th April 2017 at £100,000 increasing in £25,000 increments annually, up to £500,000 in 2020/2021. Anything over these limits is subject to a 40% tax bill.   How then can you legitimately reduce your tax bill.   Indeed, if you plan ahead, you can  legally reduce your inheritance tax bill.   Clearly the best way forward is to avoid paying any tax altogether and that is to reduce your estate value to below the current threshold of £325,000.  Start enjoying your retirement is always the first piece of practical advice. 

However, there are other ways and means to reduce your inheritance tax bill:

  1. Gifts – Giving gifts are a way to reduce your final estate value.   Each taxyear you can give away £3,000 with these gifts falling outside your estate immediately.   You can also give larger sums of money, but these will stay within your estate valuation for seven years.   Assuming you live for seven years then these gifts fall outside your estate and avoid IHT.  
  2. Pension Planning – As of April 2015 pension pots will no longer be subject to a 55% tax when  passed onto loved ones after the saver dies.   This means that any funds in a pension pot can be passed onto a named individual without any tax implications if they die before the age of 75.   Consider also transferring all your non-pension assets to fund your pension.   By shifting your savings into a draw down scheme, they will no longer be included in your final estate valuation and, therefore, will avoid inheritance tax.   
  3. Trusts – If you put some of your cash, property or investment into a Trust which you, your spouse and none of your children under 18 years can benefit from, they are no longer part of your estate.  For example you could set up a Trust to pay for your grandchildren’s  education or support a family member with a disability.  
  4. Charity – Anything you leave to a charity is free of inheritance tax, so a useful way of reducing your inheritance tax bill while benefitting a good cause.
  5. Life Insurance – A way of safeguarding “gifts” before the seven year deadline for the beneficiaries to take out life insurance against an inheritance tax bill.   This is extremely popular for single parents who do not want children to have to sell the family home to pay a tax bill.   The policies themselves should make sure that the life assurance pay out, goes into Trust.
  6. Business Business Property Relief also provides relief from inheritance tax on the transfer of relevant business assets at 50% or 100%.   Similarly, agricultural property relief reduces the agricultural value of any transfer value of agricultural property made in a person’s life time or on death, usually at 100% of the agricultural value.  

If you would like more information on the above, or anything else concerning tax planning in general then please do not hesitate to contact either myself, Stephen Craig, or one of my colleagues.